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Freddie Mac rolls out agency’s 10th STACR note offering

The credit-risk transfer deal is unveiled as rising rates are boosting the risk for future ‘defaults and losses’

Freddie Mac is launching its 10th credit-risk transfer transaction of the year via its Structured Agency Credit Risk (STACR) program, bringing the total note offerings through its two flagship STACR series programs to $12.8 billion so far in 2022.

The new credit risk transfer (CRT) offering, STACR 2022-DNA7, outlined in a presale report by Kroll Bond Rating Agency, involves a $616 million note offering backed by a reference loan pool of 69,144 residential mortgages with an outstanding principal balance of $19.9 billion. 

CRT transactions to date, and going forward, could prove to be a wise fiscal prophylactic for note issuers such as Freddie Mac, given the direction of the market — as described in the KBRA bond-rating report.

“The Federal Reserve has signaled that the policy response to rising levels of inflation may be a series of rate increases over the course of 2022,” KBRA notes in its bond presale report. “CPRs [conditional prepayment rates, a measure of early loan payoffs] may continue to slow and may remain low in such a rising interest rate environment as borrowers have ‘locked in’ low mortgage financing and have a reduced incentive to refinance.

“Lower prepayment rates extend the average life of mortgage portfolios and can generally cause a larger set of borrowers to be exposed to economic stresses, which can lead to increased levels of defaults and losses.”

Freddie’s latest CRT transaction, based on a tally of deal data to date, brings the total volume of reference pool single-family loans to nearly $326 billion for the nearly $13 billion in STACR risk-transfer note offerings so far this year. The reference pools for the STACR credit-risk transfer (CRT) transactions to date in 2022 are composed of a total of some 1.1 million single-family mortgages. 

The offering totals were tallied across the agency’s two flagship STACR risk-sharing vehicles, which to date include seven STACR-DNA and three STACR-HQA series offerings. The STACR-DNA series is designed for reference-pool mortgages with loan-to-value (LTVs) ratios ranging from 60% to 80% while the STACR-HQA series is designed for high LTV loans (80% to 97%), according to the agency.

Through Freddie Mac’s STACR transactions, private investors participate with the agency in sharing a portion of the mortgage credit risk in the reference loan pools retained by the agency. Investors receive principal and interest payments on the STACR notes they purchase, but if credit losses exceed a predefined threshold per the security issued, then investors are responsible for absorbing the losses exceeding that mark

The leading underwriters for the loans in the reference pool for Fannie’s 10th STACR offering, slated to close Sept. 30, per the KBRA report, are United Wholesale Mortgage, 8.9% of the loans; Rocket Mortgage, 8.1%; Wells Fargo, 6.6% and J.P. Morgan Chase Bank, 4.1%, according to the KBRA report. The leading states for the loan originations are California, 14.3%; Florida, 10.4%; and Texas, 7.6%.

The bulk of the loans in the reference pool, 70.4%, are less than six months old, according to KBRA’s report, with another 29.2% aged between six and 12 months. The average balance for the loans is $289,105, with the maximum balance at nearly $1.6 million.

The initial STARC deal of this year, STACR 2022-DNA1, was a $1.4 billion note offering issued against a reference loan pool of 190,774 residential mortgages with an outstanding principal balance of $33.6 billion. In the second offering, STACR 2022-DNA2, Freddie issued a $1.9 billion note against a reference pool of 143,889 single-family mortgages valued at about $45 billion.

Since then, Freddie has issued eight additional STACR credit-risk sharing offerings through the STACR DNA and HQA flagship series, including the most recent offering, for a total of 10 offerings to date. The leading originators for the single-family mortgage reference pools linked to those transactions are UWM, J.P. Morgan Chase, Wells Fargo, Pennymac, Rocket Mortgage, Amerihome and Newrez LLC, according to presale reports from KBRA and DBRS Morningstar bond rating agencies.

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